In a defined contribution plan, the employer or employee — or both — contributes a fixed-dollar amount to the employee's pension for each year the employee is with the company, typically, with the employer directing the funding — although some companies offer participant-directed plans.
While maximum plan contributions are determined by law and employers are responsible for setting up individual accounts for each participant, plan benefits are not pre-set and depend on how well the contributions have been invested. If investment return is better than expected, more money is available for retirement; if not, retirees can expect to receive less. So, while participating employees enjoy some control over how their contributions are invested, if investment return is less than expected, and the eventual retirement income of participants does not meet their needs, some former participants may wish they'd been in a defined benefit plan, instead.
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